Changes to the income tax law affecting consolidated groups

28 Nov 2011

In media release No 2011/159, issued 25 November 2011, the Assistant Treasurer and Minister for Financial Services and Superannuation, Bill Shorten, announced that the Government will introduce changes to the income tax law affecting consolidated groups relating to the way a consolidated group can deduct the costs allocated to some assets following a corporate acquisition.

The changes implement the recommendations of the Board of Taxation for future consolidations and seek to ensure that companies inside corporate groups don't receive tax benefits, which corporates outside consolidated groups are unable to receive. The Board's report, entitled "Review of the Consolidation Rights to Future Income and Residual Tax Cost Setting Rules", was released on the same day.

The Board made the following recommendations for changes to the future operation of the consolidation rules:

The consolidation tax cost setting rules should apply only to assets already recognised for taxation purposes.

The residual tax cost setting rule should be modified so that, for the purpose of applying the rule to an asset, the consolidated group is taken to acquire the asset as part of a business acquisition.

The rights to future income rules should be limited to rights to unbilled income (or work in progress amounts) so that they align with deduction provisions in the general tax law.

The tax cost setting rules should treat majority owned revenue assets as retained cost base assets, to prevent the double claiming of deductions by a single economic group in relation to the same revenue asset.

In accordance with the terms of reference, the Board outlined a number of options the Government could consider in deciding whether to address, retrospectively, the unanticipated cost to the revenue of the rights to future income and residual tax cost setting rules.

The Board also recommended that the Government could further investigate the treatment of liabilities in the tax consolidation regime and whether the tax cost setting amount allocated to assets in the tax consolidation regime could be capped at the greater of their market value or terminating value. Mr Shorten said: "I look forward to the Board's further advice on these issues when it reports on its post implementation review of certain aspects of the consolidation regime."

In making the announcement about the changes, Mr Shorten said: "The new laws will help protect potential threats to revenue by putting a limit on the scope of amendments to the consolidation regime made in 2010."

The changes affecting a corporate acquisition will depend on the time when the acquisition took place.

Corporate acquisitions that took place before 12 May 2010 will be affected by the changes subject to the application of normal amendment periods. These changes are necessary to ensure deductions are claimed only when it was intended and will protect a significant amount of revenue that would otherwise be at risk.

Changes for the period between 12 May 2010 and 30 March 2011 will largely protect taxpayers who made business decisions on the basis of the current law before the Board's review was announced.

For acquisitions after 30 March 2011 changes will be made to increase certainty for taxpayers and apply a business acquisition approach in certain cases.

Private rulings sought and received by taxpayers from the ATO, including written advice under advance compliance agreements, will stand.

In media release No 38 issued 25 November 2011, the Chairman of the Board of Taxation, Chris Jordan, welcomed the Assistant Treasurer's announcement.

In addition, Mr Shorten announced that the Government will also make changes to the operation of the taxation of financial arrangements (TOFA) rules for consolidated groups.

These changes will ensure that, for consolidated groups, the TOFA Stages 3 & 4 provisions operate as intended and that the tax treatment of financial arrangements that are liabilities is appropriate.

The changes also address the technical issues raised by industry as part of the post-enactment consultation on the TOFA Stages 3 & 4 regime and ease the transition of consolidated groups into the regime.

The changes will apply from the start of TOFA Stages 3 & 4 regime. The changes are set out in an attachment to Mr Shorten's media release, to be found here

Mr Shorten said that the Government will undertake public consultation on draft legislation for these measures as a matter of priority.